DAX consolidates as AI boom loses political support

Following its new record high at the start of today's trading session, the DAX is already having to defend the psychologically important 26,000-point mark. The correction across international equity markets is gathering momentum, with semiconductor and artificial intelligence (AI) stocks coming under particularly heavy selling pressure. Following sharp losses on Wall Street, the weakness has spread to Asian markets. Both Japan's Nikkei and South Korea's Kospi are declining, with heavyweights Samsung Electronics and SK Hynix suffering substantial losses.

Political uncertainty weighs on AI investment

Investors are beginning to realise that the US midterm elections could also change the political landscape underpinning the AI boom. Shifts in political majorities and changes in leadership at state level could lead to data centre projects previously considered secure being reassessed. This is creating growing uncertainty about future investment requirements and the pace of planned capacity expansion. The AI industry could now face headwinds precisely where it is most vulnerable: the multibillion-dollar investments required to build out its infrastructure. The generous valuation premiums previously awarded to the sector are increasingly being questioned and unwound.

Oil prices revive inflation concerns

At the same time, geopolitical tensions in the Middle East are escalating once again. Attacks on oil tankers have pushed crude oil prices higher, dampening hopes of a swift de-escalation of the conflict. The path towards a political solution is proving more difficult than many investors had recently anticipated. As a result, concerns about another surge in inflation are resurfacing. The combination of falling technology stocks and rising energy prices is particularly uncomfortable for financial markets. While growth expectations in the AI sector are coming under pressure, higher energy costs threaten to slow the broader economic recovery.

Markets reassess risk premiums

Recent developments illustrate just how far investor expectations had, in some cases, become detached from economic and political realities. Following the powerful rally, risk premiums are now being reassessed and excessive share price expectations corrected. Equity markets need to regain their footing in reality. The crucial question is whether this adjustment can proceed in an orderly fashion or whether selling pressure in the technology sector will spread to other parts of the market.

German earnings offer a counterweight

Nevertheless, European equity markets still have an opportunity to decouple, at least partially, from the weakness in US technology stocks. The predominantly convincing quarterly results from German companies continue to support hopes of a sustained economic recovery. Daimler Truck is also providing positive momentum with its results released today. The DAX's comparatively lower exposure to highly valued AI companies could prove advantageous in the current market environment. The anticipated year-end rally therefore does not necessarily have to be abandoned, although the road towards it is likely to be considerably bumpier than investors expected just a few days ago.